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The biggest challenge for students and parents when planning for education is the financial costs, which include tuition and academic expenses. There is help – 529 Plans aren’t just for college anymore. K-12 private and religious schools are also eligible. Funds can be used for four and two year colleges, trade schools, graduate programs and some international institutions.
Section 529 of the IRS Tax Code authorized this tax-advantaged savings plan to help with the costs of education. 529 distributions are subject to guidelines for financial aid eligibility, as well as state and learning institution limitations. The tax advantage is that distributions are not taxed at the federal level, but you do need to understand the rules for qualifying expenses. You are required to report all 529 spending to the IRS – so it’s important to keep good records and separate qualified and nonqualified receipts.
Here’s a list of 529 qualified educational expenses:
To take distributions from a 529 plan, you need to submit your request for the cash during the same calendar year. If you inadvertently request cash during the academic year, you may owe taxes as a nonqualified withdrawal.
It’s a good idea to begin by sitting down with family members and the future student to create a withdrawal plan that works for the student’s needs, the school’s curriculum and the program’s eligibility. It helps everyone to understand how best to use the 529 distributions while establishing a manageable budget for qualified and nonqualified purchases.
The advent of technology has introduced changes to learning methods and academic practices. Computers and some electronics have been added to the list of qualified education expenses as part of the 529 distributions. They must be required as part of the students’ study programs. Students need to check with the school about class or course prerequisites that include computers.
Check with the school; there may be specialized expenses as students enter college as a freshman. The same applies as they complete the final years of study, preparing to enter the career world.
Keep in mind, each state and school may have different restrictions on using 529 funds. If you are unsure about anything, check with your financial advisor or plan provider. They can help develop the best strategy for 529 withdrawals that will avoid incurring a ten percent penalty for non-qualified withdrawals.